Indian startup scene buzzes as venture debt crosses billion dollar mark

It has been a challenging year for the overall startup ecosystem, not only in India but globally. Startup investing is considered as a risky asset class and typically has a failure rate in the excess of 80%. Still, venture debt has been pouring in. Artificial Intelligence (AI) is adding an exciting flavour to the market and startup focused initiatives are pouring in from Indian institutions and the government.

India’s startup ecosystem, ranking third globally, secured US$8 billion in VC investment in 2023, about 3% of the global venture capital market. Despite challenges, India’s performance signals a critical evolution in investment trends and economic factors shaping the startup landscape.

Read more: 2023 Indian tech startup investment is a mixed bag of pvt. & govt.

In a landmark year, India’s Venture Debt (VD) market crossed the billion-dollar mark, as per the India Venture Debt Report 2024, the third edition of its kind.

India’s venture debt market also reached a record $1.2 billion in CY23—a 50% increase from the previous year. This surge, accounting for approximately 175-190 deals, reflects a robust Compound Annual Growth Rate (CAGR) of about 34% from 2017 to 2023, marking venture debt as a burgeoning asset class in India’s financial landscape.

This leap signals a shift towards strategic financing, propelling Indian innovation to global prominence. With the market poised to hit $1.8-2Bn by 2026, India’s future in the global startup scene looks not just promising but unstoppable

Ishpreet Singh Gandhi, Founder & Managing Partner, Stride Ventures

Ishpreet Singh Gandhi, Founder & Managing Partner, Stride Ventures, said, “Venture Debt in India, surpassing $1.2Bn in 2023, marks a milestone in the nation’s startup journey as evidence of a matured ecosystem and entrepreneurial dynamism. This leap signals a shift towards strategic financing, propelling Indian innovation to global prominence. With the market poised to hit $1.8-2Bn by 2026, India’s future in the global startup scene looks not just promising but unstoppable.”

Growing Preference for One-Stop Debt Solutions

There’s a growing preference for one-stop debt solutions that offer comprehensive financial packages, simplifying the capital-raising journey for startups. This trend reflects the market’s maturity and the increasing sophistication of venture debt solutions tailored to the nuanced needs of fast-growing and global-minded companies.

As both founders and VCs increasingly integrate venture debt to balance equity and growth, it becomes central to India’s funding landscape, signifying a pivotal evolution in the startup ecosystem

Apoorva Sharma, Managing Partner, Stride Ventures

Apoorva Sharma, Managing Partner, Stride Ventures said, “India’s venture debt market is swiftly expanding, jumping from $800Mn to $1.2Bn of venture debt within a year, highlighting a seismic shift in investor confidence and strategic adoption. This surge is fuelled by thorough due diligence and the asset class’s promise of resilience and returns. As both founders and VCs increasingly integrate venture debt to balance equity and growth, it becomes central to India’s funding landscape, signifying a pivotal evolution in the startup ecosystem.”

Moreover, venture debt has become a versatile tool for financial management, strategic growth, and risk mitigation, emphasizing its value beyond traditional equity financing methods.

To cite a good success case, Inflection Point Ventures, an Indian active angel investment platform, announced 14 exits from 2023 giving a stellar IRR of 61% to its investors. In 2023, IPV achieved a phenomenal 217% IRR (~40x MOM) with a full exit from Project Light (name withheld). Along with 3 full exits, IPV secured partial exits from 11 other startups through the year, delivering IRRs ranging from 20% to 97%.

These exits, involving over 1,000 individuals’ investments, translated into lucrative returns, with an average holding period of 1.5 to 2 years. Notable successes include partial exits from high-performing startups like Oorjaa, Devnagri, Aerem, and Ishitva generating an average IRR of 80%. With this, IPV has announced 38 exits in under 5 years.

AI Ups the Ante

AI software companies are projected to grow 63% faster in 2024 than non-AI software companies because of customer demand. This is expected to result in higher valuations for the right type of companies as AI demand builds throughout the year.

If you were building a company in 1996 and you didn’t mention the internet, you’d be out of your mind

Kleiner Perkins VC

Over 80% of startup pitches involve AI, a Kleiner Perkins VC tells TechCrunch. “If you were building a company in 1996 and you didn’t mention the internet, you’d be out of your mind,” he says.

Recently, HAF launched its maiden Venture Capital Fund, a Category 1 Alternative Investment Fund (AIF), featuring an investable corpus of INR 100 crore and an additional greenshoe option of INR 50 crore. This strategic fund is specifically designed to focus on startups placing a significant emphasis on scalability through technology and AI.

The fund aims to deploy up to INR 5 crore across 20 disruptive startups that are positioned to scale with technology and AI in Pre-Series A/Series A with a strong commitment to follow-on investments to support future growth.

As an active investor in numerous venture funds and startups, I am of the belief that fostering an active engagement platform between Limited Partners (LPs)/ investors and entrepreneurs is pivotal for creating successful businesses

BVR Mohan Reddy, Founder & Executive Chairman of Cyient

BVR Mohan Reddy, Founder & Executive Chairman of Cyient, said, “As an active investor in numerous venture funds and startups, I am of the belief that fostering an active engagement platform between Limited Partners (LPs)/ investors and entrepreneurs is pivotal for creating successful businesses.”

Indian Startup Scene Buzzing with Initiatives

Much activity has occurred in the sector in the Indian startup sector recently. Events like the Startup Mahakumbh, which just ended at Bharat Mandapam in New Delhi are an inspiration.

Bodhisattva Sanghapriya, Founder and CEO of IG Drones, said, “Events like ‘Startup Mahakumbh’ are very important for India’s new businesses. They inspire new ideas and help businesses grow all over the country. They also fit well with the idea of ‘Atmanirbhar Bharat’ and ‘Viksit Bharat,’ where businesses lead the country’s growth.”

India’s revered institutions like IITs and IIMs are proactively empowering startups. In March, not-for-profit society, IIT Hyderabad Technology Incubation Center (iTIC) an incubator under the aegis of the Indian Institute of Technology Hyderabad (IITH) and Ansys Software Private Limited (Ansys, NASDAQ: ANSS), an engineering simulation software company in India, joined forces to empower technology startups in the field of engineering simulation.

Also, in March, NSRCEL, the incubation arm of IIM Bangalore (IIM-B), tied up with GPS Renewables, an Indian clean fuels technology & engineering company, to introduce Campus Founders – a student entrepreneurship program aimed at supporting college-based startup founders and recent graduates in transforming their startup ideas into thriving businesses.

Read more: Despite funding winter India ranks 5th highest funded country in Q3 2023, maintains 4th position in total funding for the year to date

The 4-month long program will focus on innovative solutions in sustainability, climate change, and hardware development.

Indian Bollywood actors too are contributing to the startup scene. In February, renowned actor and entrepreneur Suniel Shetty inaugurated Kal Ke Krorepati, an initiative dedicated to spotlighting the burgeoning startup ecosystem of India. The initiative invited 500 startups from across Gujarat to submit their business proposals and concepts, culminating in the meticulous selection of 27 promising ventures spanning various industries and offering innovative solutions.